Back to the future

This is a guest post by Karel Williams, Professor of Accounting and Political Economy at Alliance Manchester Business School. The views of guest contributors are not necessarily those of the New Economics Foundation.

Conference season, autumn 2017, and the commentariat’s gaze is fixed on the novelties: the Tories may not survive as our default party of government if their factionalised party tears itself apart on the terms of Brexit; the Labour opposition prepares to fight the next election on an old left manifesto leavened by new sweeteners on student debt. But the basic trope of post-1945 politics survives unexamined and uncriticised: in the next Westminster election, all the major parties will campaign on ​“vote for us and we will make the economy work for you”.

After agreeing on the generics of upgrading infrastructure and skills, parties will differ about appropriate policies for growth: Labour will press renationalisation of utilities and public investment in regional development; the Tories will offer sector deal industrial policy to defend and build next generation industries and talk up their city deals. But, behind these differences, is an enduring consensus on what ​“making the economy work” means: the overall objective is growth of market income (measured by GDP and GVA) on the assumption that, if market activity increases, that will bring jobs that distribute welfare through wages.

Over time, this consensus has survived large changes in the policies that will supposedly deliver growth and jobs. The fiscal Keynesianism and directive regional policy of the 1950s and 1960s is very different from Thatcher’s structural reform of privatisation and labour market deregulation; or again from the post-2010 austerity cuts in public spending combined with loose monetary policies of quantitative easing and zero interest rates. And there are now increasing demands from the OECD and others in the last few years for ​“inclusive growth” because of growing inequalities in distribution of income and wealth.

As environmentalists insist, growth of market income is a dubious objective because it ignores external costs. But, there is also an internal problem in the UK when Treasury and both front benches are in denial about the mechanics of unsustainable growth and how jobs will never diffuse welfare in the current UK economy. On the mechanics, in the UK credit buys unsustainable growth. Consumption accounts for more than 60% of UK GDP and unsustainable spurts of growth can always be generated by opening the taps on credit which boosts asset prices that then leaks into consumption. Zero interest rates and quantitative easing since the financial crisis simply formalise the long established de facto policies of Thatcher and Blair: under both prime ministers, housing equity withdrawal was larger than nominal GDP growth.

Meanwhile, jobs will not distribute welfare broadly given the nature of the UK economy. The effects of deindustrialisation have been compounded by deregulating the labour market (and more recently allowing free movement from Eastern Europe). The bargaining position of manual labour is undermined and, in consequence, the bottom 20% of working households have gained almost nothing from the last 25 years of GDP growth. We have tried to combine a US-style labour market with European style income support and the result is a bill for welfare which is politically unsustainable and brutal cuts which will not be reversed.

The central point is that access to foundational goods and services is not solved by rising market incomes. Most foundational services are collectively provided.

Social inclusion is a worthy objective but inclusive growth is not going to happen in the UK. The credit-fuelled spurts of growth produce temporary highs, but continuous increases in asset prices are unsustainable and spurts in house prices simply congeal wealth inequalities. Further, in the UK’s deregulated and open labour market, any increase in jobs simply increases the bill for income support: between 1979 and 2010 the number of UK working households receiving more in benefits than they paid in taxes increased from 27% to 40% and it remains stuck around 35% after brutal welfare cuts.

It is time to reassess assumptions, and we can begin to do this by recalling the past. In the national settlement after 1945 and in local government from 1880 onwards, the state intervened to deliver the ​‘foundational’ goods and services necessary to the health and welfare of every household. The post-1945 national settlement was about providential services like hospitalisation and universal primary and secondary schooling free at point of use. In an earlier period, municipalities like Manchester led in providing the systems of pipes and cables which connected every household to gas, water and sanitation; as well as providing model social housing for ordinary Mancunians. And the net result was a 30-year increase in life expectancy.

It is time to go back to the future and refocus national, regional and local government on access to these foundational services. This takes us into politics. All households depend daily on the providential services and material infrastructure which make everyday life possible, safe and civilised. Securing these foundational services is therefore a matter of asserting and extending citizen rights. But it is also about economics, because the foundational economy includes large-scale employers. In the UK right now, some 45% of jobs are in foundational sectors like health, retail and infrastructure.

The central point is that access to foundational goods and services is not solved by rising market incomes. Most foundational services are collectively provided: the individual consumer can buy a handset or a router but not a 4G network or rural broadband. Old problems recur, as with the need for social housing provision in the 2010s because stock has been sold off, ownership is unaffordable and we are spending billions on subsidising private landlords. Each generation also faces new problems at the boundary of civilised life so that care for the elderly in an ageing society is a large and growing problem in the 2010s.

Yes, the policy debates and knockabout in the 2017 party conferences will be diverting. But, the serious question is: how long will it be before we (once again) see a major party election manifesto and annual conference focused on foundational issues?